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<?xml version="1.0" encoding="utf-8"?>
<!DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Strict//EN"
"http://www.w3.org/TR/xhtml1/DTD/xhtml1-strict.dtd">
<html xmlns="http://www.w3.org/1999/xhtml" lang="en" xml:lang="en">
<head>
<!-- 2022-10-18 Tue 13:45 -->
<meta http-equiv="Content-Type" content="text/html;charset=utf-8" />
<meta name="viewport" content="width=device-width, initial-scale=1" />
<title>Teletech</title>
<meta name="author" content="Matt Brigida, Ph.D." />
<meta name="generator" content="Org Mode" />
<link rel="stylesheet" type="text/css" href="https://fniessen.github.io/org-html-themes/src/readtheorg_theme/css/htmlize.css"/>
<link rel="stylesheet" type="text/css" href="https://fniessen.github.io/org-html-themes/src/readtheorg_theme/css/readtheorg.css"/>
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</head>
<body>
<div id="content" class="content">
<h1 class="title">Teletech</h1>
<div id="table-of-contents" role="doc-toc">
<h2>Table of Contents</h2>
<div id="text-table-of-contents" role="doc-toc">
<ul>
<li><a href="#org9371496">1. Discussion</a></li>
<li><a href="#org68aa6b5">2. Weighted-Average Cost of Capital (WACC)</a>
<ul>
<li><a href="#orgf322fbd">2.1. Cost of Equity for Divisions</a></li>
<li><a href="#orgd81ec17">2.2. Cost of Debt for Divisions</a></li>
</ul>
</li>
<li><a href="#orgffec7a6">3. Thought Experiment</a></li>
<li><a href="#orgbb2c9af">4. WACC Calcultion</a></li>
</ul>
</div>
</div>
<p>
Should all projects (and management performance measures) use a corporate-wide WACC?
</p>
<ul class="org-ul">
<li>Manager pay is tied to the hurdle rate though the EVA calculation. This makes managers argue for their vested interests.</li>
<li>The effect of using the wrong hurdle rate is misallocation of resources—poor capital budgeting decisions.</li>
</ul>
<div id="outline-container-org9371496" class="outline-2">
<h2 id="org9371496"><span class="section-number-2">1.</span> Discussion</h2>
<div class="outline-text-2" id="text-1">
<ul class="org-ul">
<li>The effects of being a conglomerate on financial analysis.</li>
<li><b><b>Investment decision is independent of the financing decision.</b></b></li>
<li>"A single hurdle rate may deprive an <b><b>unprofitable</b></b> division….." (page 223)</li>
<li>The human element: pay tied to the hurdle rate.</li>
</ul>
</div>
</div>
<div id="outline-container-org68aa6b5" class="outline-2">
<h2 id="org68aa6b5"><span class="section-number-2">2.</span> Weighted-Average Cost of Capital (WACC)</h2>
<div class="outline-text-2" id="text-2">
<p>
<a href="https://financial-education.github.io/wacc/">See this presentation</a>
</p>
</div>
<div id="outline-container-orgf322fbd" class="outline-3">
<h3 id="orgf322fbd"><span class="section-number-3">2.1.</span> Cost of Equity for Divisions</h3>
<div class="outline-text-3" id="text-2-1">
<p>
Divisions of a firm can't offer equity, so how can we get the divisions beta coefficient? We can look for publicly-traded <code>pure plays</code> and use their cost of equity.
</p>
</div>
</div>
<div id="outline-container-orgd81ec17" class="outline-3">
<h3 id="orgd81ec17"><span class="section-number-3">2.2.</span> Cost of Debt for Divisions</h3>
<div class="outline-text-3" id="text-2-2">
<p>
Divisions of a firm may or may not be able to issue their own debt. If they do, and we can get a market price, we can use that as firm cost of debt.
</p>
<p>
Otherwise we can get an estimate (from a bank or by looking at a similar <code>pure play</code>) of the debt's rating, and use the cost of debt for that rating.
</p>
</div>
</div>
</div>
<div id="outline-container-orgffec7a6" class="outline-2">
<h2 id="orgffec7a6"><span class="section-number-2">3.</span> Thought Experiment</h2>
<div class="outline-text-2" id="text-3">
<p>
Say there is a company with two divisions.
</p>
<ul class="org-ul">
<li>The first division is a risky new social network. It has a 20% cost of capital. Higher expected return.</li>
<li>The second is a very safe railroad, which has a 5% cost of capital. Lower expected return.</li>
</ul>
<p>
Both division are the same size, so the total firm cost of capital is 12.5%.
</p>
<p>
Now, say each division is considering a new project. <b><b>If each division uses the corporate-wide hurdle rate</b></b>, which division is more likely to accept the project? Which is more likely to reject?
</p>
<p>
Consider what happens in the limit as each division considers more projects. What will the firm ultimately become?
</p>
</div>
</div>
<div id="outline-container-orgbb2c9af" class="outline-2">
<h2 id="orgbb2c9af"><span class="section-number-2">4.</span> WACC Calcultion</h2>
<div class="outline-text-2" id="text-4">
<ol class="org-ol">
<li>What is each divisions capital structure?</li>
<li>What is each divisions beta?</li>
</ol>
</div>
</div>
</div>
<div id="postamble" class="status">
<p class="author">Author: Matt Brigida, Ph.D.</p>
<p class="date">Created: 2022-10-18 Tue 13:45</p>
<p class="validation"><a href="https://validator.w3.org/check?uri=referer">Validate</a></p>
</div>
</body>
</html>